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Why the Tension Between Socialism and Capitalism Will Intensify

It's encouraging that Americans spent 2012 looking up the meaning of "socialism" and "capitalism," since both concepts are largely misunderstood. This newfound knowledge is going to come in handy over the next several years, because the battle the two economic extremes may only be getting started.

Merriam-Webster announced recently that "socialism" was the word with the most online lookups in 2012, with "capitalism" coming in right behind. Searches for "socialism" spiked around the time of the Supreme Court ruling on President Barack Obama's healthcare reform law, no doubt because critics derided it as the government takeover of healthcare. "Capitalism" was often the next word people looked up after investigating socialism.

This year's presidential election included many bastardized references to both economic systems, which have been broadly mischaracterized for a long time. Many defenders of capitalism argue that the nation's economic system was more pure a decade ago (or two, or three), but America hasn't had pure capitalism in well over a century. And when it did have a raw form of capitalism, the consequences were often disastrous for significant chunks of the population, which is why public support grew for the kind of regulated capitalism we have now.

In the 1800s, the federal government largely stayed out of the economy, with nothing like the regulatory apparatus we have now. That's one reason people like Andrew Carnegie, John Jacob Astor, John D. Rockefeller, Cornelius Vanderbilt, and J.P. Morgan built vast fortunes -- often from monopolies or cartels--that still exist in various forms today. But unregulated capitalism also generated speculative bubbles, financial panics and destitution much more frequently than those things have occurred over the last 70 years.

Public pressure led to a long series of reforms that morphed into the regulated free-market economy we have today. In the early 1900s, Teddy Roosevelt started to break up some of the all-powerful monopolies that enriched a few while overcharging the masses. Congress created the Federal Reserve and the income tax in 1913. A slew of regulatory agencies grew out of the Great Depression. During the 20th century, presidents of both parties signed legislation creating new agencies to oversee food, medicine, the environment and Wall Street (ahem). We still have a capitalist system centered on private ownership and prices set by the free market, but it's layered with rules meant to prevent abuses.

Some Americans obviously feel there are too many rules, with a vocal set of critics claiming that Obama in particular has ushered in a system that's more like socialism than capitalism. That's hyperbole. Obama's new healthcare plan obviously will involve a lot more government involvement in the delivery of health care. But that happened because the prior system (which was itself governed by a dense thicket of insurance-company rules) failed to keep medical costs at affordable levels or make healthcare available to everybody. As in the past, public pressure for something better led to government intervention.

Anybody familiar with real socialism ought to know that it's not what we have in America today. If it were, the government would control most industries and own most of the property, and most Americans would be paid similar wages determined by government bureaucrats. In reality, 84 percent of American workers are employed in the private sector, with just 16 percent employed in government. Most people's pay is determined by what they're able to convince a company or a group of customers to pay them, with no upper limit. Anybody who has the money to buy private property can. More than 60 percent of American families own the home they live in.

Still, the ideological battle between the forces of socialism and capitalism is far from over, and probably likely to intensify in coming years. For much of the time following World War II, the United States was characterized by "an economy of abundance and a psychology of scarcity," as the historian Barbara Dafoe Whitehead has noted. In general, a booming economy provided more than relatively humble Americans expected. But now, thanks to globalization, declining U.S. competitiveness and a swollen social-safety net, we may have an economy of scarcity and a psychology of abundance. Many Americans expect a better standard of living than they're likely to get.

During the next decade or two, the U.S. government is going to have to stop living on borrowed money. The mushrooming cost of entitlement programs like Medicare, Medicaid and Social Security is going to force some tough choices: Either working Americans will have to pay way more than prior generations to support seniors and the underprivileged, or those dependent upon government will get much thinner benefits. One approach is socialistic, transferring an increasing amount of wealth from one group to another. The other is capitalistic, in that it requires far greater self-reliance and provides less of a safety net for those who can't fend for themselves.

The ultimate outcome will be somewhere between pure capitalism and true socialism, which is where the U.S. economy always has always ended up. But it could be much closer to either extreme than it is now. Keep your dictionary handy.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.